This paper examines the relationship between the stock price and nominal exchange rate in Malaysia to ascertain the significance of using rubber price as a correction mechanism. The Johansen cointegration test was employed to investigate the effects of linear combination and the relationships among the components in a multiple time series. A two-regime, intercept adjusted Markov switching vector error correction model was also used to examine the parameters concerned. Rubber price is used as a correction mechanism. Because rubber is one of Malaysia’s main exports, using rubber price as a correction mechanism may affect the country’s economy. The results of this study show that the said variables have cointegrating relations. Further, the nominal exchange rate has a negative relationship with the changes in stock price. Markov switching vector error correction model was found to be suitable for examining the data as the findings had a small variance.
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